Wednesday, February 18, 2009

More on Not Bailing Out Cerberus

James Kwak helps explain why we shoudn't bail out Cerberus in the name of "saving" Chrysler:
There are two other plausible reasons why Cerberus would prefer to go to the government. The first is if they can get cheaper capital (a lower-interest loan) from the government than from their limited partners or from the capital markets. But then the question becomes why the government should be in the business of giving cheap capital to a private equity firm that has other sources of capital.

The other possibility is that Cerberus/Chrysler doesn't actually believe the plan, and that's why Cerberus doesn't want to put in the money. The plan is a Hail Mary strategy that might work, but the chances of it working aren't good enough to put in their own money; but if they can get free money from the government (free in the sense that if Chrysler collapses, Cerberus won't have to repay the government), they might as well give it a shot.
You already know that I'm a believer in the second scenario. I don't see why Cerberus can't be required to guarantee loans to Chrysler with its remaining portfolio. If that's something they would purport to "violate their fiduciary duty to their limited partners", well, too bad, so sad, get the loan somewhere else.

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